What Will New Acts of Congress Mean for Stretch IRAs?
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What Will New Acts of Congress Mean for Stretch IRAs?

The SECURE and RESA acts are currently being considered in Congress. These acts may impact stretch IRAs. A stretch IRA is an estate planning strategy that extends the tax-deferred condition of an inherited IRA, when it is passed to a non-spouse beneficiary. This strategy lets the account continue tax-deferred growth over a long period of time.

If a parent doesn’t need her Required Minimum Distributions, does it make sense to do a gradual Roth IRA conversion and use the RMDs to pay taxes on the conversion? Or should the parent invest the RMDs in a brokerage account?

There are several options in this situation, according to nj.com’s recent article, “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”

Congress is considering legislation with the SECURE and RESA Acts, that would eliminate the ability of children to create a stretch IRA, one that would let them to stretch distributions from the inherited IRA over their lifetimes.

Under the proposed SECURE and RESA Acts under consideration, the maximum deferral period will be 10 years. If the beneficiary is a minor, the period would be 10 years or age 21.

The best planning strategy for a parent would depend on her overall finances and what she wants for her children’s inheritance.

The conversion to a Roth may be a good planning move, depending on her tax bracket. Putting the money in a brokerage account is also an option.

A parent may also want to think about using the RMD proceeds to purchase a life insurance policy held by an irrevocable trust for the benefit of her children.

It’s best to contact an experienced estate planning attorney, so he or she can review the details of the parent’s finances and help her choose the best options for her situation.

Reference: nj.com (October 15, 2019) “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”

Can I Keep a Loved One’s Inheritance From Their Spouse?

A recent nj.com article asks, “How do I protect my niece’s inheritance from her husband?” The article says that in a scenario where someone plans to leave most of her estate to her niece but doesn’t want her estranged husband to get his hands on the money, she must be proactive to make sure the funds go where she intends them to go.

If this happens in New Jersey, the niece’s inheritance will be subject to the New Jersey inheritance tax. The tax is levied based on the relationship of the deceased to the beneficiary. In this case, the niece’s inheritance would be subject to an inheritance tax of 15 to 16%.

This inheritance tax is assessed, because the aunt is a New Jersey resident. It doesn’t matter where the beneficiary resides.

One option is for the aunt to leave the assets to the niece outright or in trust.

The laws in many states, like Missouri, South Carolina, and New Jersey, say that unless the parties otherwise agree, upon divorce there will be equitable distribution of their marital property. Marital property generally doesn’t include the property received by gift or inheritance, as long as that person didn’t co-mingle it with the marital property.

Therefore, the most economical way to transfer property to the niece, is to leave it to her in the testator’s will, with instructions for her to keep it separate and apart from her marital property.

An outright bequest may not be the best way to leave property to the niece, even though it’s probably the most economical method for the aunt.

However, if the aunt leaves the inheritance in trust, she’ll make certain the property isn’t commingled with marital assets.

Further, if the trust is properly prepared by an experienced estate planning attorney, the income from the trust will likely not be used to decrease any support to which the niece may otherwise be entitled from her spouse, in the event that they divorce down the road. The trust can also protect against other events, by instructing to whom funds should be paid upon the premature death of the niece. That would further prevent her estranged husband from ever being able to make a claim against the funds.

Reference: nj.com (August 21, 2019) “How do I protect my niece’s inheritance from her husband?”

Why You Might Want a Charitable Lead Annuity Trust in Your Estate Plan

The IRS has posted an anonymized version of a letter ruling about charitable lead annuity trusts (CLAT), a trust used in estate planning. In case you were wondering, anonymized means that any information in the letter ruling that could be used to identify the parties involved, has been removed.

A CLAT letter ruling could be of interest to those who are using life insurance, annuities, or other instruments in estate planning.

Think Advisor’s recent article, “IRS Posts Charitable Lead Annuity Trust Letter Ruling,” explains that if the taxpayer passes away prior to the taxpayer’s spouse, the trust is supposed to pay specified debts and expenses, then distribute the trust assets to other individuals and trusts.

If the spouse dies first, the trust is supposed to pay specified expenses and make specified distributions of the assets to individuals and trusts. The trust is then supposed to push the remaining assets into a CLAT. The CLAT is then to pay a charity an annuity amount, that is equal to 5% of the fair market value of the initial trust estate.

A CLAT is designed to have a benefit stream that lasts a specified number of years.

Leslie Finlow, a senior technician reviewer at the IRS Office of Associate Chief Counsel for passthroughs and special industries, said in the letter ruling that the IRS will treat the CLAT as having a benefits payment term of a specified term.

While the term will depend on the amount of assets that winds up in the CLAT, determining the term will be possible, when the trust ends up with its share of the estate, she noted.

If the taxpayer, the spouse, and the trust meet a number of conditions, the taxpayer’s estate should be able to take a tax deduction for the present value of the annuity payments from the CLAT, Finlow explained.

“To the extent any estate, succession, legacy, or inheritance taxes are paid from the residue prior to funding the CLAT pursuant to the terms of revocable trust or by the law of the jurisdiction under which the estate is administered, the amount of the charitable deduction in either estate is determined using the actual amount passing to the CLAT after payment of such taxes,” Finlow writes.

Note that a letter ruling gives the views of one IRS official. A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s situation.

Reference: Think Advisor (August 19, 2019) “IRS Posts Charitable Lead Annuity Trust Letter Ruling”

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